2009 a distant memory as Dubai World again in debt talks

Anyone involved in the Dubai financial scene at the end of November 2009 can testify to the great drama that unfolded in the emirate and went crashing around the world.

Dubai World, in denial about the extent of its financial problems since the credit crunch and banking crisis that began the previous year, finally accepted the inevitable with an announcement that it was seeking a "standstill" from creditors owed about US$25 billion; as the implications sank in, local and regional markets crashed and global investors panicked, pulling money out of Dubai on fears that apparently sovereign-backed obligations would not be repaid.

It was the depths of the financial crisis for Dubai, and the beginning of the sovereign debt crisis that eventually counted Greece, Portugal, Ireland and Spain as casualties, and which is only just unwinding in Europe.

How times have changed. A couple of days ago the Financial Times reported "Dubai World in talks to extend terms of $10.5bn loan", and local, let alone global markets, barely flinched.

Here was confirmation of what many observers have believed to be the case since the Dubai World “settlement” with creditors in 2010. The deal struck with more than 100 banks back then, touted as a resolution to the conglomerate’s, and the emirate’s debt problems, was actually more of a sticking plaster than a cure. At some stage, the restructuring itself would have to be restructured.

Although there has been no official acknowledgement of the new initiative to alter the terms of the 2010 deal, it was inevitable from last April, when Dubai World appointed the US investment bank Blackstone as a “fresh pair of eyes” to review the conglomerate’s debt repayment, with a mandate for “debt optimisation”, in the peculiar language of the bankers. (Surely the optimal position on debt in the normal world is to have none at all?)

The decision to embark on a new round of debt restructuring this time is a very different affair. Just to remind, the 2010 deal carved up the debt pile into three lumps: one was a $10bn chunk owed mainly by Nakheel, then Dubai World’s property subsidiary; another lump of about $4.8bn that Dubai World said it would repay in five years; and a third tranche of $10.5bn to be repaid in eight years.

It is this final amount that is the subject of the new talks. Nakheel has largely dealt with its problem, and is to repay the remainder of its debts early, it was recently announced. The $4.8bn maturing in September next year is well within Dubai World's capabilities, after some pretty smart asset disposal work by the conglomerate over the past year or so, augmented by its own cash generation expertise.

Now Dubai World is saying to creditors, which include global banks such HSBC, Standard Chartered and Lloyds, as well as a host of other regional banks: We will repay the 2015 element early, but would like you to put back the repayment date on the rest of the loans until 2022.

The situation now is, again, very different to the dark days of 2009 and 2010. The Dubai economy is booming, the property market has largely regained the levels last achieved in 2008, and the oil price – not a material element for Dubai but part of the overall “feelgood” factor for the region – is still at historically high levels.

Dubai policymakers have take some steps to ensure a “bubble” situation is unlikely to develop again, and the emirate looks set for several years of sustained growth up to and beyond Expo 2020.

Macroeconomic events in the wider world could still conspire to knock it off course, but Dubai can do little about those. Its recovery and prospects look as assured as is possible.

So there is an element of casualness in the new talks with bankers. Of course we can repay the $10.5bn, Dubai is saying, but it would be much more convenient to put it off for a while to allow us to fully capitalise our new growth strategy.

The bankers’ reaction is likely to be mixed. Some will argue that Dubai’s improved prospects mean that it can afford to pay on time; others will accept the logic of postponement, and be grateful for early repayment of next year’s debts.

There will be some posturing and showboating, but in the end the likelihood is that Dubai will get a new deal.

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